A “Dilbert” strip once featured Dogbert posing as Dilbert and making investments on his behalf, focusing on tobacco companies, sweatshops, and diamond mines. When Dilbert asked how his investments were doing, Dogbert replied that it was mixed. Dilbert's portfolio now boasted a 37 percent return, but his soul would burn for eternity.
If you can empathize with this story, then you may be part of a growing subsector of the investment market that's focusing on “impact investing,” or investments made not only in the pursuit of growth or dividends but in pursuit of a better tomorrow for everyone. It's a growing subsector of investors, too, so having a handle on impact investing may prove to offer a positive outcome in more ways than one.
The Appeal of Impact Investing
No matter what your personal opinion on the matter may be—whether you believe impact investing to be the only hope for mankind or a pile of drivel designed to separate fools from their money—there's no doubt that it is a field on the grow. The Morgan Stanley Institute for Sustainable Investing revealed that not only are 95 percent of millennials interested in impact investing but 85 percent of individual investors, in general, are interested as well. This means that not only is virtually all of the biggest new blocs of disposable income-holders interested but so too is a major portion of every investor in the field, assuming the study holds true beyond its sample size of 1,000 investors.
The Institute's study comes with a bit of a caveat in its own right, however; it notes that just over half of respondents are currently working with “...at least one sustainable investing activity.” This raises two possibilities: one, there may be a chunk of investors working with more than one, and two, there may be some who are interested, but not sufficiently interested—or sufficiently able—to back that interest with cash. However, since the Institute's study isn't the only one in the field—several other such studies have provided notes of assent that there are increases in interest in impact investing across the board.
Impact investing isn't actually new; it dates back to the 1960s and the establishment of “Socially-Responsible Investment” (SRI) funds. The concept has expanded substantially since then, allowing for a wider range of personal peccadilloes to be addressed, from not investing in firearms manufacturers to focusing on investments featuring businesses owned or operated by minorities.
Such investing has led to some criticism, most notably that it limits diversification. There are only so many firms, after all, that especially focus on the promotion of gender equality in the boardroom. However, it's worth pointing out that there are currently over 350 ESG—Environmental, Social, and corporate Governance—funds available to invest in, and all available through major brokerages like Vanguard or Charles Schwab. With that many funds available, the notion of insufficient diversification doesn't hold so much water.
Additionally, those who want to commit their 401(k) to sustainable investments are likely to have a tougher time of it than most; the Morgan Stanley report found that 88 percent of people with a 401(k) want to invest sustainably, but only four percent of 401(k) plans will even offer the option. Here, investors can always limit their 401(k) investments to the company match point and then move some of their take-home pay to the more sustainable options.
While not every investor will want to tailor their investments to sustainable or socially responsible options, not everyone will want the guilt load that comes with the Dilbert-style investment of sweatshops, diamond mines, and tobacco stocks, 37 percent return or no. Having the option, however, is well worth looking into. No one will ever know if sustainable investing will fund retirement, or allow the investor to ultimately buy that solar-powered Tuscan villa of their dreams. What it will do, however, is put a little extra juice behind some firms that are taking their place in society a little more seriously than others, and that may be enough to at least let the investors sleep better at night.